February 10, 2021
The only thing that has not benefited from video game use has been the brick-and-mortar retail chains like GameStop, which still rely on physical sales in a world swiftly transitioning to digital transactions. That changed last month as GameStop’s stock skyrocketed as part of a frenzy orchestrated by small-time investors on Reddit and TikTok. To get back at the hedge funds profiting off GameStop’s steadily declining business, these investors banded together to buy the company’s stock and increase its value. That created a “short squeeze,” forcing the hedge funds that had shorted GameStop’s stock to buy more and more shares to cover their losses. The stock’s price reached a high of $483 on January 29, up 12,000% from its $4 price around this time a year ago.
When I looked online, I found that a short sale is a transaction where the seller does not own the stock being sold. Instead, they borrow it from the broker-dealer where they place the sell order. The seller has the obligation to buy back the stock at some point in the future. Short sellers are subject to the risk of short squeezes. A short squeeze occurs when a heavily shorted stock moves sharply higher, which “squeezes” more short sellers out of their positions and drives the price of the stock higher. That is what happened with GameStop. The advantage of a short sale is that it allows traders to profit from a drop in price. Short sellers aim to sell shares while the price is high, and then buy them later after the price has dropped. The hedge funds who bought GameStop stock for short sale were making millions.
A hedge fund is an “investment fund that trades in relatively liquid assets and can make extensive use of more complex trading, portfolio-construction, and risk management techniques to better performance.” One of the tools of the hedge fund is short selling. Financial regulators generally restrict hedge fund marketing to institutional investors, high net worth individuals, and others who are considered “sufficiently sophisticated.” Many of the small investors who drove the GameStop frenzy were not “sufficiently sophisticated.” However, when they banded together, they were able to cause the hedge funds huge losses while making money for themselves. Perhaps sophistication is relative.
Thoughts: The elite rarely give credit to those they consider beneath them. That was true with the hedge fund traders in the stock market. That was also true with the revolutions of Europe: the American Revolution in 1776, the French Revolution in 1789, and the Russian Revolution in 1917. When the populace did rise it caused a frenzy as power shifted from the elite to the masses. While some say a living wage is a right for every worker, others say we cannot afford it and point to “small business” as an example. MacDonald’s small franchises reported over $93 Billion in sales during 2020. We cannot afford not to provide this help to our essential workers. That is what 1776 was all about. Do the work. Change is coming and it starts with you.